ASU Financial Market Outlook (2013)

Anthony Chan, Ph.D Managing Director & Chief Economist Chase Private Client

Investment products: Not FDIC insured No bank guarantee May lose value
Please see important information at the end of this presentation.

US Corporations Remain Flush With Cash

Corporations have high cash balances in order to deal with uncertainty Cash and Equivalents/Tangible Assets
12%

Global merger and acquisition activity remains at low levels relative to the size of corporations cash balances M&A Volume in trillions of USD
1.6

11%

1.4

10%

1.2

9% 1.0 8% 0.8 7% 0.6 6% 0.4 5% 0.2

4%

3% 1970 1973 1977 1980 1984 1987 1991 1995 1998 2002 2005 2009

0.0 2007

2008

2009

2010

2011

2012

Source: Federal Reserve

Source: S&P, Federal Reserve, Bloomberg, FactSet, J.P. Morgan Securities LLC

Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions.

Share of Corporate Profits Remain Near-Record Highs

Adjusted After-Tax Corporate Profits (% of GDP)
Includes inventory and capital consumption adjustments 12

10

8 50-yr. avg. : 6.2% 6

0 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Source: The Bureau of Economic Analysis, Haver Analytics

Bullish Signal: The Equity Risk Premium Remains Attractive

Equity risk premium shows the dislocation in Europe Next 12 months earnings yield less regional Investment Grade Corporate Bond Yields 8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00% S&P 500 1.00% MSCI Europe MSCI EM (Emerging Markets)

0.00% 1/1/2010

7/1/2010

1/1/2011

7/1/2011

1/1/2012

7/1/2012

Source: S&P, FactSet, Bloomberg

History Suggests Attractive U.S. Equity Returns At Current Valuations

P/E and Total Return Over 5-yr. Annualized Periods
Quarterly, 1Q 1952 to 2Q 2007
60%

P/E = 13.0

40%
Implied Annual Return Standard Error 13.3% 5.7%

20%

0% 5x 10x 15x 20x 25x 30x

-20%

-40%

Source: BEA, FRB, J.P. Morgan Asset Management. Prices are based on the market value of all U.S. corporations and include quarterly dividends. Valuation based on long-term PE ratio. Note: Orange line denote results of linear regression with R-squared of 0.35 for 5-yr. Returns. Data are as of 11/2/12.

Higher Consumer Sentiment Signals Multiple Expansion in Equities

Multiple Expansion and Contraction
S&P 500 forward P/E based on consensus EPS estimates
120 26

Est. impact of a 10pt. Rise in sentiment: +2.3 multiple points*

110 24

22 100 20 90 18 80 16 70 14

Correlation Coefficient: 0.85

60 12

50 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Consumer Sentiment (LHS) Forward P/E (RHS)

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Source: Standard & Poors, FactSet, J.P. Morgan Asset Management. Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next twelve months. *Estimated impact based on coefficients from regression analysis. Data are as of 11/2/12.

Average (U.S.) 12-Month Returns When Investor Sentiment (Bullish Percentage Minus Bearish) Spread is 1.5 and 2 standard deviations Below its Average

30.0% 1988 - 1992 [18.6%] 1998 - 2002 [13.9%]

2003 - 2006 [22.8%]

25.0%

2010 - 2011 [16.3%]

20.0%

15.0% Average Return [25] 10.0% 1993 - 1994 [6.4%]

[5]

[5] [7]

5.0% [5] 0.0% 2007 - 2009 [-9.4%]

-5.0%

-10.0% [16]

-15.0%
Source: AAII Sentiment Survey, Bloomberg

Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions.

Cumulative Equity Market Returns During the Current Expansion Remain Moderate Considering all the Monetary and Fiscal Stimulus that has been Supplied.

S&P 500 returns during economic expansions

S&P 500 returns during economic contractions

309.6 9.6 241.5

14.2 8.0

-0.9

62.0 43.4 11.6 Aug-80 Jun-81 Dec-82 May-90 Apr-91 Feb-01 Dec-01 Nov-07 Jun-09 Present Jan-80 Jul-80 Jul-81 Nov-82 Jul-90 Mar-91 Mar-01 Nov-01 -35.0 Dec-07 Jun-09

Source: Bloomberg, National Bureau of Economic Research

Note: Returns are total returns during the specified time periods.

Corporate High Yield Investments Remain Attractive

As Returns Continue To Price-In Higher than Expected Defaults
Default rate, percentage
25%

Implied Default Rate

20%

15%

Actual Default Rate

10%

5%

0% 1988

1992

1996

2000

2004

2008

2012

Source: J.P. Morgan Securities LLC Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions. High yield bonds are speculative non-investment grade bonds that have higher risk of default or other adverse credit events which are appropriate for high-risk investors only.

U.S. Currency Outlook:

The cumulative current account balance of the United States has been in a secular decline
Current Account Balance, percent of GDP
2%

1%

0%

-1%

-2%

-3%

-4%

-5%

-6%

-7% 1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: Bureau of Economic Analysis

Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions.

As the US Dollar $ has Weakened, Emerging Market Currencies Have Strengthened

The decline in the USD has been matched by appreciation in Emerging Market currencies
Cumulative total return
0.40

0.30

0.20

J.P. Morgan Asia Dollar Index

0.10

0.00

J.P. Morgan Emerging Market Currency Index

-0.10

-0.20

-0.30

US Trade Weighted Dollar

-0.40

-0.50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: J.P. Morgan Securities LLC, Bloomberg Past performance is not indicative of future returns. It is not possible to invest directly in an index. Please see appendix for index definitions.

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Outlook for Precious Metals:

Gold prices have generally reacted positively to Expansionary Monetary Policy

The Gold Spot price (XAU) is quoted as US Dollars per Troy Ounce
2,000 1,900 1,800 B 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 2008 Fed extends Operation Twist Fed announces QE-3 QE-1 QE-2 Operation Twist

2009

2010

2011

2012

2013

B = Ben Bernanke's August 27, 2010 speech at Jackson Hole. Source: Bloomberg

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Emerging Market Outlook: Liquidity in China is Much Greater than Signaled by Conventional Metrics
Yields on high yield credit imply higher defaults than expected

China: Total Amount of Social Financing SA, 100 Mil.Yuan

%

China: Total RMB Loan: 12-Month Percent Change

25000 35

20000

30

15000 25 10000 20 5000 15

-5000 02 03
Source: J.P. Morgan Securities LLC Source: People's

10 04 05 Bank of China 06 07 08 09 10 11 12

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Index Definitions
Allindexperformanceinformationhasbeenobtainedfromthirdpartiesandshouldnotberelieduponasbeingcompleteoraccurate.Indicesareshownforcomparison purposeonly.Whileaninvestormayinvestinvehiclesdesignedtotrackcertainindices,aninvestorcannotinvestdirectlyinanindex. BarclaysUSAggregateTotalReturnIndex TheLehmanAggregateIndexcoverstheU.S.investmentgradebondmarket,withindexcomponentsforgovernmentand corporatesecurities,mortgagepassthroughsecurities,andassetbackedsecurities. S&P500Index TheS&P500isacapitalizationweightedindexof500stocksfromabroadrangeofindustries.Thecomponentstocksareweightedaccordingtothetotal marketvalueoftheiroutstandingshares.Theimpactofacomponentspricechangeisproportionaltotheissuestotalmarketvalue,whichisthesharepricetimesthe numberofsharesoutstanding.S&P500isatrademarkofStandardandPoorsCorporation. MSCIEAFEIndex TheMSCIEAFETotalReturnIndex(Europe,Australasia,FarEast)isafreefloatadjustedmarketcapitalizationindexthatisdesignedtomeasure developedmarketequityperformance,excludingtheUS&Canada. MSCIEmergingMarketsIndex TheMSCIEmergingMarketsIndexisafreefloatadjustedmarketcapitalizationindexthatisdesignedtomeasureequitymarket performanceintheglobalemergingmarkets MSCIEuropeIndex TheMSCIEuropeIndexisacapitalizationweightedindexthatmonitorstheperformanceofstockslistedinthecontinentofEurope. MSCIWorldIndex TheMSCIWorldIndexisacapitalizationweightedindexthatmonitorstheperformanceofstocksfromaroundtheworld. DowJones/UBSCommodityIndex(DJUBS) TheDowJones/UBSCommodityindexiscomposedoffuturescontractson19physicalcommodities. J.P.MorganDomesticHighYieldIndex TheJ.P.Morgan DomesticHighYieldIndexisanindexdesignedtotracktheperformanceoftheinvestibleuniverseoftheU.S. dollardomestichighyieldcorporatedebtmarket. DollarIndex indicatesthegeneralinternationalvalueoftheU.S.Dollar.Theindexdoesthisbyaveragingtheexchangeratesbetweenthe USDandmajorworld currencies,usingtheratesprovidedbyapproximately500banks. J.P.MorganDevelopedMarketHighYieldIndex(JPMGlobalHighYield) Anindexofdevelopedmarkethighyieldbonds ChicagoBoardOptionsExchangeVolatilityIndex(VIX) TheVIXindexisameasureoftheimpliedvolatilityoftheU.S.equitymarketwhichiscalculatedusingaweighted blendofpricesforarangeofoptionsontheS&P500index. USTradeWeightedDollarIndex indicatesthegeneralinternationalvalueoftheU.S.DollarbyweightingeachexchangeratebytheUStradewiththerelevant countryor region Moodys/REALCPPIIndex Amonthlyindexthatisacompositecommercialrealestatepriceindex S&PCaseShiller HomePriceIndex TheCaseShiller IndexmeasuresthevalueofresidentialrealestatepricesintheUnitedStates NationalAssociationofHomeBuildersUSHousingMarketSurvey derivedfromasurveyofbuilderexpectations,ratingtheoutlookforthenext6monthsofsales CitigroupEconomicSurpriseIndex theseindicesarequantitativemeasuresofeconomicnews,measuringthehistoricalstandarddeviationsofdatasurprises AAIIBulls/Bears theseindicesshowthesentimentofindividualinvestorstowardsthestockmarketoverthenext6months J.P.MorganEmergingMarketsCurrencyIndex thisindexshowstheperformanceofemergingmarketexchangerates J.P.MorganAsiaDollarIndex ThisindexshowstheperformanceofAsianexchangeratesagainsttheU.S.Dollarusingcompositespotrates

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Important information
IRSCircular230Disclosure:JPMorganChase&Co.anditsaffiliatesdonotprovidetax advice.Accordingly,anydiscussionofU.S.taxmatterscontainedherein(includingany attachments)isnotintendedorwrittentobeused,andcannotbeused,inconnection withthepromotion,marketingorrecommendationbyanyoneunaffiliatedwith JPMorganChase&Co.ofanyofthemattersaddressedhereinorforthepurposeof avoidingU.S.taxrelatedpenalties. Eachrecipientofthispresentation,andeachagentthereof,maydisclosetoany person,withoutlimitation,theU.S.incomeandfranchisetaxtreatmentandtax structureofthetransactionsdescribedhereinandmaydiscloseallmaterialsofany kind(includingopinionsorothertaxanalyses)providedtoeachrecipientinsofaras thematerialsrelatetoaU.S.incomeorfranchisetaxstrategyprovidedtosuch recipientbyJPMorganChase&Co.anditssubsidiaries. BankproductsandservicesareofferedthroughJPMorganChaseBank,N.A.andits affiliates.SecuritiesandadvisoryservicesareofferedbyJ.P.MorganSecuritiesLLC, memberNYSE,FINRAandSIPC. 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